2016 (11) TMI 255 - AT - Income Tax

Claim of depreciation/deffered revenue expenditure on the lump sum consideration paid for creation of client base as an intangible asset - Held that - Client creation cost is an intangible asset and is eligible for depreciation at 25%. Assessing Officer is directed to allow depreciation as claimed in the computation of income.

Summary

Issues Involved:
1. Claim of depreciation on lump sum consideration paid for the creation of a client base as an intangible asset.
2. Alternate claim of deferred revenue expenditure.
3. Eligibility of the expenditure as a revenue expense under Section 37(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Claim of Depreciation on Lump Sum Consideration Paid for Creation of Client Base as an Intangible Asset:
The core issue is whether the lump sum payment of ?6 Crore, which includes ?4 Crore for client creation cost and ?2 Crore for brand, logo, intellectual property, and internal control systems, qualifies for depreciation as an intangible asset under Section 32(1)(ii) of the Income Tax Act, 1961. The assessee argued that the entire amount should be treated as an intangible asset and thus eligible for depreciation. The Assessing Officer (AO) allowed depreciation only on the ?2 Crore component, treating it as an intangible asset, but rejected the claim for the ?4 Crore client creation cost.

The Tribunal cited the case of SKS Micro Finance Ltd. vs. DCIT, where a similar claim was allowed, stating that the acquisition of a client base constitutes a "business or commercial right of similar nature" under Section 32(1)(ii). The Tribunal upheld that client creation cost is an intangible asset eligible for depreciation at 25%, directing the AO to allow the depreciation as claimed by the assessee.

2. Alternate Claim of Deferred Revenue Expenditure:
The assessee also claimed the amount as deferred revenue expenditure, arguing that it should be allowed proportionately over a period. The Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, stating that there is no provision in the Income Tax Act for allowing deferment of expenditure except in specific circumstances.

The Tribunal, following the decision in SKS Micro Finance Ltd., found this issue to be academic in nature because the primary claim of depreciation was allowed. Therefore, the alternate grounds for deferred revenue expenditure were not addressed in detail.

3. Eligibility of the Expenditure as a Revenue Expense under Section 37(1):
The assessee contended that the entire expenditure could be treated as a revenue expense and allowed under Section 37(1) of the Income Tax Act, 1961. This argument was raised as an alternate ground if the primary claim of depreciation was not accepted.

Since the Tribunal allowed the claim for depreciation, the issue of treating the expenditure as a revenue expense under Section 37(1) became moot and was not further considered.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to treat the client creation cost as an intangible asset eligible for depreciation at 25%. Consequently, the alternate claims of deferred revenue expenditure and treatment under Section 37(1) were deemed academic and not addressed further. The decision was pronounced in the open court on 21.10.2016.